Public Information Notice No. 10/22

Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Qatar

February 17, 2010

On February 8, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Qatar on a lapse of time basis.¹

Background

Qatar continued to deliver an impressive economic performance in 2009, despite the global slowdown. Overall real GDP growth is estimated at 9 percent, following a 16 percent growth in 2008, underpinned by expansions in the production of liquefied natural gas (LNG) and condensates, and a strong performance in the nonhydrocarbon sector. A sharp fall in domestic house rents has led to deflation in 2009—the sharpest among the countries of the Gulf Cooperation Council (GCC). Fiscal policy continued to support growth through continued development spending, albeit with re-prioritization of a few government projects. The external current account is estimated to have recorded a large surplus (about 15.7 percent of GDP) on account of the rebound in the prices of oil and gas, and the central bank’s gross reserves strengthened further to around 5 months of imports of goods and services.

The global turmoil and the recent developments in Dubai have had a limited impact on the banking system. Recent preemptive equity injections and asset purchases by the authorities have helped to further improve the resilience of the system. Although the underlying fundamentals remain strong, weak sentiment stemming from the global financial crisis and the recent Dubai restructuring have weighed on share prices, with the equity market rebounding only marginally in 2009.

Qatar’s growth performance is expected to be even stronger in 2010, driven by a rapid expansion in LNG production (and related industries) and a pick up in manufacturing and construction. Following the deflation experienced in 2009, inflation is expected at around 1 percent in 2010, on account of increases in international prices for food and raw materials and the impact on domestic prices of planned infrastructure investments. The fiscal and external current accounts are projected to remain in surplus in 2010, mainly reflecting favorable oil prices.

Qatar’s medium-term outlook remains positive, with continuing strong growth, moderate inflation, and fiscal and external current account surpluses. The main risks to this outlook include a slow global recovery, a large further decline in real estate prices, reduced availability of financing for projects, and additional unexpected adverse financial developments in the region. The projected high medium-term growth rates have the potential of overheating the economy unless the government continues to prioritize and sequence its spending towards infrastructure projects.

Executive Board Assessment

Executive Directors commended the Qatari authorities for successfully steering the economy through the global financial crisis and enhancing the growth prospects and financial stability of the Qatari economy. They noted that supportive macroeconomic policies have helped maintain investment, which contributed to strong growth, and to sizeable fiscal and external surpluses. The central bank’s macro-prudential policies, as well as timely and decisive intervention helped moderate the impact of the global crisis on the domestic banking system.

Directors considered the medium-term outlook to be favorable, but noted that a key challenge facing the authorities is to dampen the potential risk of overheating stemming from their growth strategy and gradual recovery of international commodity prices. In this regard, Directors encouraged the authorities to prioritize infrastructure projects carefully in order to mitigate the emergence of supply bottlenecks and cost-push inflation. Directors also underscored the need for sustained efforts to increase absorptive capacity and diversify the economy away from hydrocarbon production and exports. Directors also agreed that Qatar’s growth strategy—which depends on investments financed through debt—could benefit from the establishment of a formal institutional structure to develop a medium-term debt management strategy.

Directors welcomed the authorities’ intention to use the available fiscal space prudently, and to enhance implementation capacity and uphold intergenerational equity in resource revenue use. They supported the emphasis on building capacity in infrastructure and easing supply bottlenecks through project prioritization. Directors concurred that the fiscal stance is appropriate and urged the authorities to maintain their capital spending—particularly since there are no fiscal sustainability concerns—until private sector activity becomes firmly entrenched.

Directors commended the authorities for their timely intervention in the financial sector, which improved liquidity and provided room for lending by banks. Nevertheless, they underscored the importance of ensuring that banks do not rebuild excessively risky asset portfolios. In this context, they encouraged the authorities to strengthen their risk management practices and the overall supervision of the banking system. Directors were encouraged by the authorities’ commitment to establishing a single regulator of financial services in the near future, and reiterated the need to close any regulatory gaps in the transition period.

Directors noted the resilience of the banking system, particularly in the face of the global crisis, as evidenced by the high capital, liquidity, and profitability levels. They welcomed the authorities’ commitment to preserving financial stability, and urged them to continue to monitor closely the evolving regional and global financial risks. In this context, Directors noted that the central bank had initiated a comprehensive review of its prudential regulations and monetary policy instruments.

Directors agreed that the Qatari riyal is in line with fundamentals and that the peg to the U.S. dollar remains appropriate. They welcomed the commitment of the Qatari authorities to the GCC Monetary Union, and commended the authorities on the recent launching of the Monetary Council.

Directors urged the authorities to continue to improve the quality of statistics, particularly in light of Qatar’s increasing integration with the global economy and the envisaged GCC monetary union. In this regard, they encouraged the authorities to build on the progress made since joining the General Data Dissemination Standards in 2005, in particular, by improving the compilation of national income and balance of payments data. They also welcomed the authorities’ intention to seek technical assistance to strengthen the balance of payments statistics and compile comprehensive data on the international investment position.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.